A Dubai Audit Services IFRS Guide to Accounting For Prepayments in Foreign Currency

Categories: Foreign Currency

A Dubai Audit Services  IFRS Guide to Accounting For Prepayments in Foreign Currency

Sometimes, transactions in foreign currencies can be a nightmare. People and companies trade with one another, but currencies are different, and foreign exchange rates fluctuate constantly. All of us are familiar with the basic rules for selecting the appropriate exchange rate. Dubai audit services and other preparers of financial services face difficulties following the rules when dealing with more complex transactions. Oft times,  we at Farhat & Co, get the same question often.

“How do financial audit teams accounting  for prepayments in foreign currency based on IFRS and what does IFRS say in regard to the effect of changing exchange rates?

Well, what we can tell you is that it is never black and white. There are many factors that come to play, including the nature of a prepayment. In this article, we shall explain why and how and share some instances for your understanding.

What The Rules Say

Standard IAS 21 The Effects on Changes in Foreign Currency Rates explains how company audit firms in Dubai teams can convert amounts into another currency in two cases:

  • How to translate and convert foreign currency amounts into your functional currency
  • How to convert foreign operations' financial statements into presentation currency

Companies in Dubai and UAE can translate foreign currency amounts into functional currency when you record transactions in foreign currency over the course of the year.

The IAS 21 standard prescribes the following for audit firms in Dubai and other users:

First recalculate all foreign currencies to your functional currency using the spot exchange rate applicable at the time of the transaction. Then recalculate the closing date or reporting date. 

All monetary items in foreign currencies using the closing exchange rate as of the reporting date. All non-monetary foreign currency items are carried at historical price using the historical exchange rates at the time of the transaction. All items other than monetary in foreign currency are fair valued using the exchange rate at the time they were determined.

 

IASB published (IFRIC 22 Foreign Currency Transactions & Advance Considerations) in 2016 to clarify the prepayments issue for audit services. This basically confirms that the date the transaction occurred, which is, in order to determine the exchange rate, the date of initial recognition or deferred income liability.

Let’s expound further:

Company audit teams must consider two crucial aspects:

  • Date of transaction
  • Prepayment is the nature.

Date of Transaction

It is obvious that audit teams in Dubai should initially use the spot rate at the time of the transaction to translate. But, what about the date of transaction? It is the date that the transaction qualifies for recognition under IFRS. It can vary for different items, such as:

Financial Liabilities: 

When an entity in Dubai becomes a party under a contract's contractual provisions.

Property, Plant and Equipment: 

When it is likely that future economic benefits from an asset will flow into the Dubai entity and the cost can be reliably measured. This sounds simple, but there may be some problems in determining the transaction day.

Prepayment: 

IAS 21 distinguishes between non-monetary and monetary items in terms of the translation at the closing rate. Closed exchange rate is used to translate monetary items. Non-monetary items cannot be retranslated. They are kept at their historical or original rate. Is the prepayment for a fixed asset monetary, or non-monetary It can be monetary or non-monetary.



One thing makes all the difference:

The right to receive or the obligation to deliver a predetermined or fixed number of units of currency. This feature may be present in prepayments. Audit services in Dubai should evaluate each prepayment individually.

  • Check the contract carefully - what is it? Is the prepayment refundable? If so, at what conditions?
  • What is the likelihood of getting a refund if there is a clause that you can have your deposit back?

Prepayments for fixed assets, goods, and services are not usually refundable.

A prepayment for a machine most of the time is non-monetary. Therefore, a company internal auditor should not recalculate it using a closing rate at year-end.

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